Some Good News on Health Care

Given the political frenzy in Washington about the botched rollout of the Affordable Care Act, it may be folly to try and make any serious points about the legislation’s long-term prospects, or about any other subject having to do with health care. Until and unless healthcare.gov is fixed, the reform will remain an open sore for the Obama Administration, and the Republicans will continue to pour salt on it. That’s only to be expected. Still, beyond the troubles of the federal online exchange, there’s other stuff happening, and some of it is encouraging.

I’m not talking here about the rising number of people signing up for coverage on the state-run insurance exchanges, although that development, which I pointed to a couple of days ago, is continuing. My subject today is a potentially historic slowdown in the rate at which over-all spending on health care is growing. The A.C.A. was intended to cover as many as possible of the fifty million Americans who don’t have any health-care coverage. But it was also designed to address inflation in health-care costs, which has been running rampant for decades. Although not recently, it turns out.

Since 2010, according to a new report by the White House Council of Economic Advisers, inflation-adjusted per-capita health-care spending has been rising at an annual rate of just 1.3 per cent. Depending on which index of prices you look at, that’s the lowest rate of increase in forty or fifty years. The slowdown in spending growth has extended across all the big categories (hospital care, physician and clinical services, prescription drugs, home health/nursing care) and across all types of health plans (private insurance, Medicare, and Medicaid). It’s a big deal.

To be sure, it’s too early to celebrate, or to attribute the slowdown in spending growth to the A.C.A, which is only starting to make its impact felt. We’ve seen periods before when the rate of health-care inflation seemed to be falling—the early nineteen-nineties come to mind—only for it to pick up again. But it’s not premature to start hoping. According to the White House’s figures, the period of markedly smaller rises in health-care spending has now extended for six years. It began in 2007, and, as far the government’s statisticians can tell, it has continued into 2013. Indeed, the slowdown has been getting more marked. Between 2007 and 2010, spending increased by 1.8 per cent a year. Since 2010, the annual rate of increase has fallen another half a percentage point.

Many observers, myself included, initially assumed that the slowdown was an artifact of the recession. During deep slumps, such as the one that the economy went through in 2008 and 2009, spending on everything declines, health care included. But as spending in the rest of the economy has picked up, not spectacularly but pretty steadily, outlays on health care have continued to lag, fanning the suspicion that something more than cyclical factors are at work.

If the slowdown in spending growth were to be sustained, it would transform the policy debate about spending and budget deficits. For decades now, the big worry in Washington has been that rising health-care costs will gradually swallow up household and government budgets, squeezing out other forms of spending, and sending the budget deficit soaring. The numbers seemed to show that this was inevitable. Between 1965 and 2010, per-capita outlays on health care increased at an annual rate of 4.5 per cent. At that rate of growth, over-all spending doubles every sixteen years, and the ramifications for purchasers of health care—individuals, firms, and the government—are huge. We’ve all seen the Congressional Budget Office projections that show Medicare and Medicaid accounting for an ever-increasing proportion of the federal budget.

If the rate of growth of health-care spending were to remain at 1.5 per cent a year, or thereabouts, rather than 4.5 per cent, the long-term trends would look very different. Instead of doubling every sixteen years, healthcare spending would take almost fifty years to double. And as long as the economy and tax revenues expanded at a reasonable rate—say 2.25 per cent or more per annum, after adjusting for inflation—the proportion of G.D.P. and the federal budget devoted to health-care spending would level off rather than continuing to climb. Even a more modest but permanent fall in the rate at which spending rises—to two or three per cent a year—would have a big financial and political impact over the long term. As long as health-care outlays rise more or less in line with G.D.P., they can be financed pretty readily, and the threat of a fiscal crisis is greatly diminished.

What has caused the slowdown in spending growth? The Council of Economic Advisers, understandably enough, is keen to assign some credit to the A.C.A., which, it says, “is contributing to the recent slow growth in health-care prices and spending and is improving quality of care.” As far as Medicare outlays go, there is some evidence to support this argument. Stipulations in the A.C.A. that were aimed at reducing overpayments to medical providers are already having some effect. In the private health-care industry, the main driving force appears to be the trend toward increased cost sharing—i.e., making consumers of health-care services bear more of the costs, largely by raising co-payments and deductibles. When people have to pay forty or fifty dollars to see a doctor instead of ten or twenty, they tend to economize on their visits, and the same goes for diagnostic tests.

Going forward, there are parts of the A.C.A. that should help to put additional downward pressure on over-all spending, in both the public and private sectors. Medicare potentially plays a big role here. In many parts of the health-care industry, the remuneration rates that Medicare sets are the starting point for negotiations between private providers and insurers in the private sector. If Medicare makes economies, they often “spill over” into the private sector, the C.E.A. report says, generating additional savings, and it cites various empirical studies to back up its argument. Outside of Medicare, the cost-saving features of the A.C.A. include taxes on so-called “Cadillac plans,” which are designed to encourage employers to choose cheaper options, and new regulations forcing insurers to pay for preventative care, which reduces health-care outlays over the long haul.

For the next few years, at least, these cost savings will be offset by a big jump in the number of people who have access to private insurance, Medicaid, or Medicare. That’s good news, not bad news: it means that many fewer Americans will be without coverage. Nevertheless, one of the concerns that I have had about Obamacare was that the cost of the reforms, and particularly those parts that fall upon the federal government, would turn out to be substantially bigger than expected. The recent moderation in spending growth has alleviated some of these worries. If it turns out to be a permanent development, and the structural reforms contained in the A.C.A. succeed in reinforcing the trend, America’s health-care challenge could turn out to be more manageable than anybody thought a few years ago. And that, potentially, is huge news.